Follow-up to the Discussion of ALJ Essex's FRAND Analysis

I reported recently on the June 26, 2014 publication of the public version of ALJ Essex's initial determination in In the Matter of Certain Wireless Devices with 3G and/or 4G Capabilities and Components Thereof,  United States International Trade Commission Investigation No. 337-TA-868.  Although the judge concluded that the respondents' products did not infringe InterDigital's patents, he went on to address (and reject) their arguments that an exclusion order would be inappropriate because the patents in suit were FRAND-encumbered SEPs.  In a follow-up post, I stated that I would take a look at the four third-party submissions on the FRAND issue—which have already been summarized on, and are available for download from, the Essential Patents blog—and would respond to some comments on my earlier post.  (Since then, as reported yesterday on Essential Patents, InterDigital filed its own public interest statement too.)   So, here goes. 

First off, I don’t think that the third-party submissions add a whole lot new to the mix.  Three of the four submissions (filed by Ericsson, the Innovation Alliance, and Senator Bob Casey) supported InterDigital, while one (filed by Microsoft) supported the respondents.  The statements that struck me the most were from Ericsson—in particular Ericsson’s statement that "as the ALJ rightly found, neither "law nor public policy require [the Commission] to offer [implementers] a safe haven, where they are free to avoid their own obligations under the agreements, can manufacture potentially infringing goods without license or consequence, can seek to invalidate the [patents] in question and yet are free from the risk of' an exclusion order."  (Ericsson repeats the point at p. 5, stating that "as the ALJ recognized . . . if exclusion orders are unavailable . . . 'the only risk to [the implementer] for violating the agreement is to pay a FRAND based royalty or fee.'")  The point is similar to that raised in the Müller-Henke paper that I blogged about last week, where the authors state that an infringer who makes use of the “safe harbor” the European Commission refers to in its Memo, Antitrust Decisions on Standard EssentialPatents (SEPs) - Motorola Mobility and Samsung Electronics - Frequently AskedQuestions, will be no worse off than if it had directly concluded a license. 

As I stated in that post, however, I don’t find this line of analysis persuasive.  An analogy that comes to mind is that, if I say you owe me a $10,000 debt and you say you don't, I can take you to court and if I prevail you have to pay up.  (I realize that the question of whether FRAND commitments are contractual in nature is a hotly contested one; I'm just using this example to illustrate a point, not to advocate a position on the contract question).  In a sense, one might say that you're no worse off contesting the debt, but that’s the way it goes if we want to preserve your right to a day in court.  And of course, you are worse off to the extent you've incurred your own attorneys' fees, and even more so if you have to pay mine.  Plus I am entitled to interest on the judgment, and as long as the interest is properly computed ultimately I’m no worse off.  (To be fair, I recognize that interest might not always be properly computed, and there is no compensation due for either side’s having to devote time to litigation that could more productively be spent doing something else.)  So at the end of the day I'm still having a hard time seeing why, going back to the FRAND context now, an injunction or exclusion order is necessary.  The main reasons for awarding injunctions in patent cases (which I think are often valid) are to reduce adjudicative and error costs that flow from having courts instead of parties determine patent value.  The main reason for not doing so is to avoid a situation where the patent owner can extract switching costs as part of the royalty.  In my judgment, the latter is a serious consideration in the FRAND context, and a right to injunctive relief makes it worse.

That said, I agree generally with Ericsson, Innovation Alliance, and ALJ Essex (and with Professor Risch, who commented on my July 9 post) that the implementer must indeed be willing to negotiate in good faith.  If the evidence shows that the implementer is acting in bad faith perhaps an injunction is appropriate—though inevitably there will be quite a difference of opinion on the question of what it means for the implementer to act in bad faith, and this is an issue that I need to focus on more deeply in the coming weeks.  I am inclined to think, though, that any approach to implementer bad faith must take into account the fact that, in general, a substantial plurality (or more) of asserted patents are either invalid or not infringed, in which case that the patent owner is legally entitled to no royalty whatsoever.

The other issue that came up in the comments to my post was whether ALJ Essex was correct in concluding that implementers should negotiate before implementing, or whether this is practically infeasible in the SEP context.  Like Professor Siebrasse, I was inclined to think the latter, but I’d be interested in hearing more about this topic.  To be sure, implementers who are SSO members themselves are aware of what is likely going to go into the standard as the standard adoption process evolves, as Kirti Gupta points out here.  But does that necessarily mean that they have a realistic opportunity to negotiate all of the necessary patent licenses in advance?  Note that the “nondiscrimination” aspect of FRAND could play a role here, as Richard Gilbert and others have pointed out:

Bilateral negotiations over licensing terms that occur before a standard issues protect those who make binding agreements with rights holders. But those who do not negotiate ex ante, including technology adopters that enter the industry after a standard has issued, may be exposed to ex post opportunistic conduct. The non-discrimination prong of a FRAND commitment can provide an umbrella of protection for technology users that negotiate licenses after firms and consumers have made investments that are specific to a standard.¹⁸

^18/ Anne Layne-Farrar, Considering Whether Ex Ante Joint Negotiations within Standard Setting Are “Reasonably Necessary,” GCP (May 2008) and Anne Layne-Farrar, Gerard Llobet, & Jorge Padilla, Preventing Patent Hold Up: An Economic Assessment of Ex Ante Licensing Negotiations in Standard Setting, 37 AIPLA Q. J. 445 (2009) (Once pivotal players obtain reasonable rates, the “non-discriminatory” component of a RAND licensing commitment ensures that other pivotal players receive reasonable rates as well).

Of course, for that to work, we need a better understanding of what nondiscriminatory means in the FRAND context (see this paper by Dennis Carlton and Allan Shampine), and the parties would need to know the terms of the licenses that have been granted to others.  Nothing is easy in this space.